Mainland slows down forex buying
With slowing capital inflows and companies retaining their foreign currencies, the central bank faces limited options to boost yuan supply
Foreign exchange accumulation on the mainland decelerated drastically this year, limiting the central bank's alternatives in boosting money supply.
The People's Bank of China's purchases of foreign exchange totalled 298.8 billion yuan (HK$365.79 billion) in the first seven months of the year, a year-on-year slump of 87 per cent, it said.
Mopping up foreign exchange earned by companies and individuals and releasing yuan into the system in return has been the most important tool used by the central bank to maintain yuan supply.
In the first seven months, the ratio of outstanding foreign exchange to broad money supply M2 fell to 28 per cent from 32 per cent a year ago.
The country's slowing trade surplus, foreign direct investment and other capital inflows are the main reasons behind the slower pace of foreign exchange build-up in the banking system as external demand slackened amid the European debt crisis and foreign investors started to pull back from China amid signs of cooling in the economy.
Meanwhile, companies and individuals have been choosing to hold on to their foreign currencies instead of converting them into the yuan as the outlook for yuan appreciation has dimmed. The total amount of foreign-currency deposits by non-financial companies and individuals on the mainland grew US$266.3 billion in the January-July period, marking a 12-fold increase over the same period last year.
"Changes in foreign-exchange holdings are having a tightening rather than an expansionary effect in corporate funding and monetary and credit environments," China International Capital Corp economist Peng Wensheng said. "And this will become a trend."